1.Market
risk is the chance that a totally unexpected event will have a significant
effect on the value of the firm or a specific investment. Answer:FALSE

2.Purchasing-power risk is
the chance that changes in interest rates will adversely affect the value of an
investment; most investments decline in value when the interest rates rise and
increase in value when interest rates fall. Answer: FALSE

3.If
a person's required return does not change when risk increases, that person is
said to be

A) risk-seeking.

B) risk-indifferent.

C) risk-averse.

D) risk-aware.

4.If
a person's required return decreases for an increase in risk, that person is
said to be

A) risk-seeking.

B) risk-indifferent.

C) risk-averse.

D) risk-aware.

5.________
is the chance of loss or the variability of returns associated with a given
asset.

A) Return

B) Value

C) Risk

D) Probability

6.The
________ of an asset is the change in value plus any cash distributions
expressed as a percentage of the initial price or amount invested

A) return

B) value

C) risk

D) probability

7.Risk
aversion is the behavior exhibited by managers who require a (n) ________.

A)increase
in return, for a given decrease in risk

B) increase in return, for a given increase in
risk

C) decrease
in return, for a given increase in risk

D) decrease
in return, for a given decrease in risk

8.Perry
purchased 100 shares of Ferro, Inc. common stock for $25 per share one year
ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The
stock is currently selling for $30 per share. If Perry sells all of his shares
of Ferro, Inc. today, what rate of return would he realize?

Answer:Realized return == 28%

9.Tim
purchased a bounce house one year ago for $6,500. During the year it generated
$4,000 in cash flow. If Time sells the bounce house today, he could receive
$6,100 for it. What would be his rate of return under these conditions?

Answer:Realized return == 55%

10.On
average, during the past 75 years, the return on small-company stocks has exceeded the
return on large-company
stocks. Answer:TRUE

11.On
average, during the past 75 years, the return on long-term government bonds has
exceeded the return on long-term corporate bonds. Answer:FALSE

12.On
average, during the past 75 years, the return on long-term corporate bonds has exceeded
the return on long-term
government bonds. Answer:TRUE

14.The
expected value and the standard deviation of returns for asset A is (See
below.)

Asset
A

A) 12 percent and 4 percent.

B) 12.7 percent and 2.3 percent.

C) 12.7 percent and 4 percent.

D) 12 percent and 2.3 percent.

15.Nico bought 100 shares of Cisco Systems stock for $24.00
per share on January 1, 2002. He received a dividend of $2.00 per share at the
end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his
stock for $18.00 per share. What was Nico's realized
holding period return? What was Nico's compound
annual rate of return?

A) -12.5%; -4.4%

B) +12.5%; +4.4%

C) -16.7%; -4.4%

D) +16.7%; +4.4%

16.Given
the following information about the two assets A and B, determine which asset
is preferred.

Answer:Asset A is preferred because it has a lower
range for the same expected return.

17.Assuming
the following returns and corresponding probabilities for asset A, compute its
standard deviation and coefficient of variation.

Answer:

SD = 3.87%

CV = SD/K = 3.87/15 = 0.26

18.Akai has a portfolio of three assets. Find the
expected rate of return for the portfolio assuming he invests 50 percent of its
money in asset A with 10 percent rate of return, 30 percent in asset B with a
rate of return of 20 percent, and the rest in asset C with 30 percent rate of
return.

19.The
creation of a portfolio by combining two assets having perfectly positively
correlated returns cannot reduce the portfolio's overall risk below the risk of
the least risky asset.On the other
hand, a portfolio combining two assets with less than perfectly positive
correlation can reduce total risk to a level below that of either of the
components. Answer:TRUE

20.The
risk of a portfolio containing international stocks generally contains less nondiversifiable risk than one that contains only American
stocks. Answer:TRUE

21.The
risk of a portfolio containing international stocks generally does not contain
less nondiversifiable risk than one that contains
only American stocks. Answer:FALSE

22.Diversified
investors should be concerned solely with nondiversifiable
risk because it can create a portfolio of assets that will eliminate all, or
virtually all, diversifiable risk. Answer:TRUE

23.Nondiversifiable risk reflects the contribution of an asset
to the risk, or standard deviation, of the portfolio. Answer: TRUE

24.Systematic
risk is that portion of an asset's risk that is attributable to firm-specific,
random causes.

Answer:FALSE

25.Unsystematic
risk can be eliminated through diversification. Answer:TRUE

26.Unsystematic
risk is the relevant portion of an asset's risk attributable to market factors
that affect all firms. Answer:FALSE

27.The
required return on an asset is an increasing function of its nondiversifiable risk. Answer:TRUE

28.The
empirical measurement of beta can be approached by using least-squares
regression analysis to find the regression coefficient (bj)
in the equation for the slope of the "characteristic line."
Answer:TRUE

29.Nico owns 100 shares of stock X which has a price of $12
per share and 200 shares of stock Y which has a price of $3 per share. What is
the proportion of Nico's portfolio invested in stock
X?

A) 77%

B) 67%

C) 50%

D) 33%

30.Nico wants to invest all of his money in just two assets:
the risk free asset and the market portfolio. What is Nico's
portfolio beta if he invests a quarter of his money in the market portfolio and
the rest in the risk free asset?

A) 0.00

B) 0.25

C) 0.75

D) 1.00

31.What
is the expected market return if the expected return on asset X is 20 percent,
its beta is 1.5, and the risk free rate is 5 percent?

A) 5.0%

B) 7.5%

C) 15.0%

D) 22.5%

32.The
term structure of interest rates is the graphical presentation of the
relationship between the annual rate of interest earned on a security purchased
on a given day and held to maturity and the remaining time to maturity.
Answer:FALSE

38.A
yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is
called

A) normal
yield curve.

B) inverted yield curve.

C) flat yield curve.

D) none
of the above.

39.The
theory suggesting that for any given issuer, long-term interest rates tends to be higher
than short-term
rates is called

A) expectation
hypothesis.

B) liquidity preference theory.

C) market
segmentation theory.

D) none
of the above.

40.The
yield curve in an economic period where higher future inflation is expected
would most likely be

A) upward-sloping.

B) flat.

C) downward-sloping.

D) linear.

41.The
yield curve in an economic period where lower future inflation is expected
would most likely be

A) upward-sloping.

B) flat.

C) downward-sloping.

D) linear.

42.In
a bond indenture, the term security interest refers to the fact that most firms
that issue bonds are required to establish sinking fund provisions to protect
bondholders. Answer:FALSE

43.In
a bond indenture, the term security interest refers to collateral pledged
against the bond. Answer:TRUE

44.The
length of the maturity on a bond offering affects its cost. In general, the
longer the maturity, the higher the cost. Answer:TRUE

45.The
length of the maturity on a bond offering affects its cost. In general, the
longer the maturity, the lower the cost. Answer:FALSE

46.All
of the following are examples of long-term debt EXCEPT

A) bonds.

B) lines of credit.

C) term
loans.

D) debentures.

47.The
legal contract setting forth the terms and provisions of a corporate bond is
a(n)

A) indenture.

B) debenture.

C) loan
document.

D) promissory
note.

48.________
is a stipulation in a long-term debt agreement that subsequent or less important
creditors agree to wait until all claims of the ________ are satisfied before
having their claims satisfied.

A) Subordination;
common stockholders

B) Subordination; senior debt

C) The combination restriction;
senior debt

D) The senior debt; common
stockholders

49.Violation
of any standard or restrictive provision by the borrower gives the lender the right
to do all of the following EXCEPT

A) alter
the terms of the initial agreement, for example accelerate the maturity date.

B) demand
immediate repayment.

C) increase
the interest rate.

D) seize the loan collateral.

50.To
compensate for the uncertainty of future interest rates and the fact that the
longer the term of a loan the higher the probability that the borrower will
default, the lender typically

A) charges a higher interest rate on long-term loans.

B) reserves
the right to change the terms of the loan at any time.

C) includes
excessively restrictive debt provisions.

D) reserves
the right to demand immediate payment at any time.

51.The
size of the loan and its issuance costs (as a percentage of the amount
borrowed) are

A) not
related.

B) inversely related.

C) independent.

D) correlated.

52.A
call feature is a feature included in all corporate bonds and allows the issuer
to repurchase bonds at the market price prior to maturity. Answer:FALSE

53.There
is an inverse relationship between the quality or
rating of a bond and the rate of return it must provide bondholders.
Answer:TRUE

54.In
a bond indenture, subordination is the stipulation that subsequent creditors
agree to wait until all claims of the senior debt are satisfied. Answer:TRUE

55.Bondholders
will convert their convertible bonds into shares of stock only when the
conversion price is greater than the market price of the stock. Answer:FALSE

56.To
sell a callable bond, the issuer must pay a higher interest rate than on an
otherwise equivalent noncallable bond. Answer:TRUE

57.The
conversion feature of a bond is a feature that is included in all corporate
bond issues that gives the issuer the opportunity to repurchase bonds at a
stated price prior to maturity. Answer:FALSE

58.A
call feature in a bond allows the issuer the opportunity to repurchase bonds at
a stated price prior to maturity. This option has a greater chance of being
exercised (to the detriment of the bondholder) if market interest rates have
risen since the bond was issued. Answer:FALSE

59.In
general, IBM bonds will experience greater trading activity (in terms of the
number of bonds traded on a given day) compared to IBM stock. Answer:FALSE

60.In
general, IBM bonds will experience less trading activity (in terms of the number
of bonds traded on a given day) compared to IBM stock. Answer:TRUE

61.Any
bond rated according to Moody's Caa
through Aaa would be considered investment grade
debt. Answer:FALSE

62.Any
bond rated according to Moody's Ba or lower would be
considered speculative or "junk." Answer:TRUE

63.A
feature that gives the issuer the opportunity to repurchase bonds at a stated
price prior to maturity is called

A) stock
purchase warrants.

B) call feature.

C) conversion
feature.

D) none
of the above.

64.An
instrument that give their holders the right to purchase a certain number of
shares of the firm's common stock at a specified price over a certain period of
time is called

A) stock purchase warrants.

B) call
feature.

C) conversion
feature.

D) none
of the above.

65.The
riskiness of publicly traded bond issues is rated by independent agencies.
According to Moody's rating system, an Aaa
bond and a Caa bond are ________ and ________,
respectively.

A) speculative;
investment grade

B) prime
quality; medium grade

C) prime quality; speculative

D) medium
grade; lowest grade

66.A
putable bond gives the bondholder

A) the
right to sell the bond back to the corporation at the original purchase price.

B) the
right to sell the bond back to the corporation at a stated premium.

C) the
right to sell the bond back to the corporation at the current market value.

D) the right to sell the bond back to the
corporation at par.

67.A
record collector has agreed to sell her entire collection to a historical
museum in three years at a price of $100,000. The current risk-free rate is 7
percent. At what price should she value her collection today?

Answer:$100,000(0.816) = $81,600

68.A
corporate financial analyst must calculate the value of an asset which produces
year-end
annual cash flows of $0 the first year, $2,000 the second year, $3,000 the
third year, and $2,500 the fourth year. Assuming a discount rate of 15 percent,
what is the value of this asset?

Answer:Using PVIF(15,n):

= $0(0.870) + $2,000(0.756) + $3,000(0.658) + $2,500(0.572)

= $0 + $1,512 + $1,974 + $1,430 = $4,916

69.What
is the value of an asset which pays $200 a year for the next 5 years and can be
sold for $1,500 at the end of five years from now? Assume that the opportunity
cost is 10 percent.

Answer:P = 200(PVIFA) + 1,500(PVIF)

=
200(3.791) +
1,500(0.621) =
$1,689.70

70.When
the required return is constant but different from the coupon rate, the price
of a bond as it approaches its maturity date will

A) remain
constant.

B) increase.

C) decrease.

D) approach par.

71.If
the required return is greater than the coupon rate, a bond will sell at

A) par.

B) a discount.

C) a
premium.

D) book
value.

72.The
ABC company has two bonds outstanding that are the
same except for the maturity date. Bond D matures in 4 years, while Bond E
matures in 7 years. If the required return changes by 15 percent

A) Bond D will have a greater
change in price.

B) Bond E will have a greater change in price.

C) the
price of the bonds will be constant.

D) the
price change for the bonds will be equal.

73.A
firm has an issue of $1,000 par value bonds with a 12 percent stated interest
rate outstanding. The issue pays interest annually and has 10 years remaining
to its maturity date. If bonds of similar risk are currently earning 8 percent,
the firm's bond will sell for ________ today.

A) $1,000

B) $805.20

C) $851.50

D) $1,268.20

74.On
January 1, 2002, Zheng Corporation will issue new
bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk
with an outstanding bond issue that has an 8 percent coupon rate that is due
January 1, 2017. This firm's bonds currently are selling for $1,091.96. If
interest is paid semiannually for both bonds, what must the coupon rate of the
new bonds be in order for the issue to sell at par?

A) 5.75%

B) 6.00%

C) 6.50%

D) 7.00%

75.To
expand its business, the Kingston Outlet factory would like to issue a bond
with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years
from now. What is the value of the bond if the required rate of return is 1) 8
percent, 2) 10 percent, and 3) 12 percent?

76.To
finance a new line of product, the Tangshan Toys has issued $1,000,000 bond
with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years.
Compute the price of the bond if the opportunity cost is 11 percent.

Answer:Coupon payment = 1,000 × 0.08 = $80

B = 80(PVIFA11%,30) + 1,000(PVIF11%,30)

=
80(8.694) +
1,000(0.044) =
$739.52

77.The
yield to maturity on a bond with a price equal to its par value will

A) be
less than the coupon rate.

B) be
more than the coupon rate.

C) always be equal to the coupon rate.

D) be
more or less than the coupon rate depending on the required return.

78.What
is the approximate yield to maturity for a $1,000 par value bond selling for
$1,120 that matures in 6 years and pays 12 percent interest annually?

A) 8.5 percent

B) 9.4 percent

C) 12.0 percent

D) 13.2 percent

79.Tangshan
Industries has issued a bond which has a $1,000 par value and a 15 percent
annual coupon interest rate. The bond will mature in ten years and currently
sells for $1,250. Using this information, the yield to maturity on the Tangshan
Industries bond is ________.

A) 10.79 percent

B) 11.39 percent

C) 12.19 percent

D) 13.29 percent

80.What
is the yield to maturity, to the nearest percent, for the following bond:
current price is $908, coupon rate is 11 percent, $1,000 par value, interest
paid annually, eight years to maturity?

A) 11 percent

B) 12 percent

C) 13 percent

D) 14 percent

81.Danno is trying to decide which of two bonds to buy. Bond H
is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual
interest. Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1,
2000 issue paying semiannual interest. The market required return for each bond
is 10 percent. When using present value to determine the prices of the bonds, Danno will find that

A) there is no difference in price.

B) the
price of F is greater than H.

C) the
price of H is greater than F.

D) he
needs more information before determining the prices.

82.Equity
capital can be raised through

A) the
money market.

B) the
NYSE bond market.

C) retained earnings and the stock market.

D) a
private placement with an insurance company as the creditor.

83.Holders
of equity capital

A) own the firm.

B) receive
interest payments.

C) receive
guaranteed income.

D) have
loaned money to the firm.

84.As
a form of financing, equity capital

A) has a
maturity date.

B) is only liquidated in bankruptcy.

C) is temporary.

D) has
priority over bonds.

85.If
bankruptcy were to occur, stockholders would have prior claim on assets over

A) preferred
stockholders.

B) secured
creditors.

C) unsecured
creditors.

D) no one.

86.Which
of the following terms typically applies to common stock but not to preferred
stock?

A) Par value.

B) Dividend yield.

C) Legally considered as equity in
the firm.

D) Voting rights.

87.Preferred
stock has characteristics of debt since it provides a fixed
periodic cash payment. Answer:TRUE

88.The
amount of the claim of preferred stockholders in liquidation is normally equal
to the market value of the preferred stock. Answer:FALSE

89.Cumulative
preferred stocks are preferred stocks for which all passed (unpaid) dividends
in arrears must be paid along with the current dividend prior to the payment of
dividends to common stockholders. Answer:TRUE

90.Because
preferred stock is a form of ownership and has no maturity date, its claims on
income and assets are secondary to those of the firm's creditors. Answer:TRUE

91.One
advantage of preferred stock is its ability to increase leverage, which in turn
will magnify the effects of increased earnings on common stockholders' returns.
Answer:TRUE

92.Supervoting shares of common stock provide shareholders
with ten times the voting power of ordinary shares of common stock.
Answer:FALSE

93.Under
the Jobs and Growth Tax Relief Reconciliation Act of 2003, dividends are
subject to a maximum tax rate of 20 percent. Answer:FALSE

94.Under
the Jobs and Growth Tax Relief Reconciliation Act of 2003, dividends are
subject to a maximum tax rate of 15 percent. Answer:TRUE

95.________
are promised a fixed periodic dividend that must be paid prior to paying any
common stock dividends.

A) Preferred stockholders

B) Common stockholders

C) Bondholders

D) Creditors

96.Dividends
in arrears that must be paid to the preferred stockholders before payment of
dividends to common stockholders are

A) cumulative.

B) noncumulative.

C) participating.

D) convertible.

97.A
firm has issued cumulative preferred stock with a $100 par value and a 12
percent annual dividend. For the past two years, the board of directors has
decided not to pay a dividend. The preferred stockholders must be paid ________
prior to paying the common stockholders.

A) $ 0/share

B) $12/share

C) $24/share

D) $36/share

98.A
firm has an outstanding issue of 1,000 shares of preferred stock with a $100
par value and an 8 percent annual dividend. The firm also has 5,000 shares of
common stock outstanding. If the stock is cumulative and the board of directors
has passed the preferred dividend for the prior two years, how much must the
preferred stockholders be paid prior to paying
dividends to common stockholders?

A) $ 8,000

B) $16,000

C) $24,000

D) $25,000

99.An
ADR is

A) a claim issued by a U.S. bank representing
ownership of shares of a foreign company's stock held on deposit by the U.S.
bank and is issued in dollars to U.S. investors.

B) a
claim issued by a foreign bank representing ownership of shares of a foreign
company's stock held on deposit by the foreign bank and is issued in dollars to
U.S. investors.

C) a
claim issued by a U.S. bank representing ownership of shares of a U.S.
company's stock held on deposit by the U.S. bank and is issued in dollars to
U.S. investors.

D) none
of the above.

100.Preferred
stockholders

A) do not
have preference over common stockholders in the case of liquidation.

B) do
have preference over bondholders in the case of liquidation.

C) do not have preference over bondholders in
the case of liquidation.

D) Two of the above are true
statements.

101.The free cash flow valuation model can be used
to determines the value of an entire company as the
present value of its expected free cash flows discounted at the firm's weighted
average cost of capital. Answer:TRUE

102.A common stockholder has no guarantee of
receiving any cash inflows, but receives what is left after all other claims on
the firm's income and assets have been satisfied. Answer:TRUE

103.Preferred stock that provides for dividend
payments based on certain formulas allowing preferred stockholders to
participate with common stockholders in the receipt of dividends beyond a
specified amount is called cumulative preferred stock. Answer:FALSE

104.Preemptive rights allow existing shareholders to
maintain voting control and protect against the dilution of their ownership.
Answer:TRUE

105.American Depositary Receipts (ADRs) are claims
issued by U.S. banks representing ownership of shares of a foreign company's
stock held on deposit by the U.S. bank in the foreign market and issued in
dollars to U.S. investors. Answer:TRUE

106.Treasury stock generally does not have voting
rights, does not earn dividends, and does not have a claim on assets in
liquidation. Answer:TRUE

107.The ________ are sometimes referred to as the
residual owners of the corporation.

A) preferred
stockholders

B) unsecured
creditors

C) common stockholders

D) secured
creditors

108.Treasury stock results from the

A) firm selling stock for greater
than its par value.

B) cumulative
feature on preferred stock.

C) repurchase of outstanding stock.

D) authorization
of additional shares of stock by the board of directors.

109.The purpose of nonvoting common stock is to

A) limit
the voting power of the management.

B) allow
the minority interest to elect one director.

C) raise capital without giving up any voting
rights.

D) give
preference on distribution of earnings to those shareholders who own the stock.

110.A proxy statement gives the shareholder the
right

A) of one
vote for each share owned.

B) to give up their vote to another party.

C) to
maintain their proportionate ownership in the corporation when new common stock
is issued.

D) to
sell their share of stock at a premium.

111.A firm issued 5,000 shares of $1 par-value common
stock, receiving proceeds of $20 per share. The accounting entry for the paid-in capital in
excess of par account is

A) $5,000.

B) $ 95,000.

C) $100,000.

D) $0.

112.A firm issued 10,000 shares of $2 par-value common
stock, receiving proceeds of $40 per share. The accounting entry for the paid-in capital in
excess of par account is

A) $200,000.

B) $380,000.

C) $400,000.

D) $800,000.

113.A firm
has the balance sheet accounts, common stock, and paid-in capital in excess of par, with
values of $10,000 and $250,000, respectively. The firm has 10,000 common shares
outstanding. If the firm had a par value of $1, the stock originally sold for

A) $24/share.

B) $25/share.

C) $26/share.

D) $30/share.

114.A firm has the balance sheet accounts, common
stock, and paid-in
capital in excess of par, with values of $40,000 and $500,000, respectively.
The firm has 40,000 common shares outstanding. If the firm had a par value of
$1, the stock originally sold for

A) $11.50/share.

B) $12.50/share.

C) $13.50/share.

D) $15.50/share.

Table 7.1

115.According to Table 7.1, Ford's common stock must
have closed at ________ per share on the previous trading day.

A) $29.64

B) $30.76

C) $30.99

D) $31.55

116.According to Table 7.1, the expected dividend
per share for Ford is

A) $0.25.

B)$1.00.

C) $2.00.

D) $3.30.

117.Referring to Table 7.1, if we assume that Ford's
dividends will grow at a rate of 10 percent forever, the required return on
Ford's stock would be

A) 7.4%.

B) 8.9%.

C) 11.0%.

D) 13.6%

118.Based on Table 7.1, Ford's earnings per share
are

A) $0.80.

B) $1.21.

C) $1.68.

D) $1.91.

119.Based on the information given in Table 7.1, the
number of shares of Ford that were traded on the previous day was

A) 2,092.

B) 20,925.

C) 209,250.

D) 2,092,500.

120.In an efficient market, the expected return and
the required return are equal. Answer:TRUE

121.To a buyer, an asset's value represents the
minimum price that he or she would pay to acquire it. Answer:FALSE

122.If the expected return is less than the required
return, investors will sell the asset, because it is not expected to earn a
return commensurate with its risk. Answer:TRUE

123.If the expected return were above the required
return, investors would buy the asset, driving its price up and its expected
return down. Answer:TRUE

124.Efficient market hypothesis is the theory
describing the behavior of an assumed "perfect" market in which
securities are typically in equilibrium, security prices fully reflect all
public information available and react swiftly to new information, and, because
stocks are fairly priced, investors need not waste time looking for mispriced
securities. Answer:TRUE

125.In an efficient market, stock prices adjust
quickly to new public information. Answer:TRUE

126.In an inefficient market, stock prices adjust
quickly to new public information. Answer:FALSE

127.In an inefficient market, securities are
typically in equilibrium, which means that they are fairly priced and that their
expected returns equal their required returns. Answer:FALSE

128.A firm has an expected dividend next year of
$1.20 per share, a zero growth rate of dividends, and a required return of 10
percent. The value of a share of the firm's common stock is ________.

A) $120

B) $10

C) $12

D) $100

129.A firm has an issue of preferred stock
outstanding that has a par value of $100 and a 4% dividend. If the current
market price of the preferred stock is $50, the yield on the preferred stock is
________.

A) 4.00%

B) 6.00%

C) 8.00%

D) none
of the above

130.The ________ is utilized to value preferred
stock.

A) constant
growth model

B) variable
growth model

C) zero-growth model

D) Gordon model

131.In the Gordon model, the value of the common
stock is the

A) net
value of all assets which are liquidated for their exact accounting value.

B) actual
amount each common stockholder would expect to receive if the firm's assets are
sold, creditors and preferred stockholders are repaid, and any remaining money
is divided among the common stockholders.

C) present
value of a non-growing
dividend stream.

D) present value of a constant, growing
dividend stream.

132.Emmy Lou, Inc. has an expected dividend next
year of $5.60 per share, a growth rate of dividends of 10 percent, and a
required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common
stock is ________.

A) $28.00

B) $56.00

C) $22.40

D) $18.67

133.A firm has experienced a constant annual rate of
dividend growth of 9 percent on its common stock and expects the dividend per
share in the coming year to be $2.70. The firm can earn 12 percent on similar
risk involvements. The value of the firm's common stock is ________.

A) $22.50/share

B) $9/share

C) $90/share

D) $30/share

134.A common stock currently has a beta of 1.3, the
risk-free
rate is an annual rate of 6 percent, and the market return is an annual rate of
12 percent. The stock is expected to generate a constant dividend of $5.20 per
share. A toxic spill results in a lawsuit and potential fines, and the beta of
the stock jumps to 1.6. The new equilibrium price of the stock

A) will
be $37.68.

B) will
be $43.33.

C) will be $33.33.

D) cannot
be determined from the information given.

135.Nico Corporation's
common stock currently sells for $180 per share. Nico
just paid a dividend of $10.18 and dividends are expected to grow at a constant
rate of 6 percent forever. If the required rate of return is 12 percent, what
will Nico Corporation's stock sell for one year from
now?

A) $190.80

B) $187.04

C) $195.40

D) $179.84

136.Tangshan China Company's stock is currently
selling for $80.00 per share. The expected dividend one year from now is $4.00
and the required return is 13 percent. What is Tangshan's dividend growth rate
assuming that dividends are expected to grow at a constant rate forever?

A) 8%

B) 9%

C) 10%

D) 11%

137.Tangshan China's stock is currently selling for
$160.00 per share and the firm's dividends are expected to grow at 5 percent
indefinitely. Assuming Tangshan China's most recent dividend was $5.50, what is
the required rate of return on Tangshan's stock?

A) 7.3%

B) 8.6%

C) 9.5%

D) 10.6%

138.________ is the actual amount each common
stockholder would expect to receive if the firm's assets are sold, creditors
and preferred stockholders are repaid, and any remaining money is divided among
the common stockholders.

A) Liquidation value

B) Book value

C) The P/E multiple

D) The present value of the
dividends

139.________ is a guide to the firm's value if it is
assumed that investors value the earnings of a given firm in the same way they
do the average firm in the industry.

A) Liquidation value

B) Book value

C) The P/E multiple

D) The present value of the
dividends

140.Which of the following valuation methods is
superior to the others in the list since it considers expected earnings?

A) liquidation
value

B) book
value

C) P/E multiple

D) present
value of the interest

141.The use of the ________ is especially helpful in
valuing firms that are not publicly traded.

A) liquidation
value

B) book
value

C) P/E multiple

D) present
value of the dividends

142.The current price of DEF Corporation stock is
$26.50 per share. Earnings next year should be $2 per share and it should pay a
$1 dividend. The P/E multiple is 15 times on average. What price would you expect
for DEF's stock in the future?

A) $13.50

B) $15.00

C) $26.50

D) $30.00

143.Nico Corporation
expects to generate free-cash flows of $200,000 per year for the next five years.
Beyond that time, free cash flows are expected to grow at a constant rate of 5
percent per year forever. If the firm's average cost of capital is 15 percent,
the market value of the firm's debt is $500,000, and Nico
has a half million shares of stock outstanding, what is the value of Nico's stock?

A) $2..43

B) $3.43

C) $1.43

D) $0.00

144.Karina's Caribbean Foods had total assets as
recorded on its balance sheet are $1,500,000. What is the value of the Karina's
common stock if it has $950,000 in liabilities, and 7,500 shares of common
stock outstanding? Answer:P = (1,500,000 - 950,000)/7,500
= $73.33

145.Scooter World has estimated the market value of
its assets to be $1,250,000. What is the value of Scooter Wrold's
common stock if it has $900,000 in liabilities, $50,000 in preferred stock, and
7,500 shares of common stock outstanding? Answer:P = (1,250,000 - 900,000 - 50,000)/7,500 = $40

146.Tangshan Antiques has a beta of 1.40, the annual
risk-free
rate of interest is currently percent, and the required return on the market
portfolio is 16 percent. The firm estimates that its future dividends will
continue to increase

at an annual compound
rate consistent with that experienced over the 2000-2003 period.

(a)Estimate the value of Tangshan Antiques stock.

(b)A lawsuit has been filed against the
company by a competitor, and the potential loss has increased risk, which is
reflected in the company's beta, increasing it to 1.6. What is the estimated
price of the stock following the filing of the lawsuit.

161.In case of international capital budgeting, a
U.S. company can minimize its political risk by creating a joint venture with a
competent and well-connected
local partner. Answer:TRUE

162.Sunk costs are cash outlays that have already
been made and therefore have no effect on the cash flows relevant to the
current decision. As a result, sunk costs should not be included as relevant in
computing a project's incremental cash flows. Answer:TRUE

163.Opportunity costs should be included as cash cash flows when determining a project's incremental cash
flows. Answer:TRUE

164.A corporation is considering expanding operations to meet
growing demand. With the capital expansion, the current accounts are expected
to change. Management expects cash to increase by $20,000, accounts receivable
by $40,000, and inventories by $60,000. At the same time accounts payable will
increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The
change in net working capital is

A) an
increase of $120,000.

B) a
decrease of $40,000.

C) a
decrease of $120,000.

D) an increase of $60,000.

165.A corporation is considering expanding
operations to meet growing demand. With the capital expansion the current
accounts are expected to change. Management expects cash to increase by
$10,000, accounts receivable by $20,000, and inventories by $30,000. At the
same time accounts payable will increase by $40,000, accruals by $30,000, and
long-term
debt by $80,000. The change in net working capital is

A) an
increase of $10,000.

B) a decrease of $10,000.

C) a
decrease of $90,000.

D) an
increase of $80,000.

166.A corporation is selling an existing asset for
$21,000. The asset, when purchased, cost $10,000, was being depreciated under
MACRS using a five-year
recovery period, and has been depreciated for four full years. If the assumed
tax rate is 40 percent on ordinary income and capital gains, the tax effect of
this transaction is

A) $0 tax
liability.

B) $7,560 tax
liability.

C) $4,400 tax
liability.

D) $7,720 tax liability.

167.A corporation is selling an existing asset for
$1,700. The asset, when purchased, cost $10,000, was being depreciated under
MACRS using a five-year
recovery period, and has been depreciated for four full years. If the assumed
tax rate is 40 percent on ordinary income and capital gains, the tax effect of
this transaction is

A) $0 tax liability.

B) $840 tax
liability.

C) $3,160 tax
liability.

D) $3,160 tax
benefit.

168.A corporation is selling an existing asset for
$1,000. The asset, when purchased, cost $10,000, was being depreciated under
MACRS using a five-year
recovery period, and has been depreciated for four full years. If the assumed
tax rate is 40 percent on ordinary income and capital gains, the tax effect of
this transaction is

A) $0 tax
liability.

B) $1,100 tax liability.

C) $3,600 tax
liability.

D) $280 tax benefit.

169.A mixer was purchased two years ago for $120,000
and can be sold for $125,000 today. The mixer has been depreciated using the
MACRS 5-year
recovery period and the firm pays 40 percent taxes on both ordinary income and
capital gain.

(a)Compute recaptured depreciation and capital gain (loss),
if any.

(b)Find the firm's tax liability.

Answer:

(a)Book Value = 120,000 (1 - 0.20 - 0.32) = $57,600

Recaptured
depreciation= 120,000 - 57,600= $62,400

Capital
gain= 125,000 - 120,000=5,000

$67,400

(b)Tax liability = 67,400 × 0.40 = $26,960

170.An asset was purchased three years ago for
$100,000 and can be sold for $40,000 today. The asset has been depreciated
using the MACRS 5-year
recovery period and the firm pays 40 percent taxes on both ordinary income and
capital gain.

(a)Compute recaptured depreciation and capital gain (loss),
if any.

(b)Find the firm's tax liability.

Answer:(a)Book
Value =
100,000 (1 -
0.20 -
0.32 -
0.19) =
$29,000

Recaptured
depreciation = 40,000 - 29,000= $11,000

Capital
gain=0

$11,000

(b)Tax liability = 11,000 × 0.40 = $4,400

171.Computer Disk Duplicators, Inc. has been
considering several capital investment proposals for the year beginning in
2004. For each investment proposal, the relevant cash flows and other relevant
financial data are summarized in the table below. In the case of a replacement
decision, the total installed cost of the equipment will be partially offset by
the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.

183.For Proposal 3, the book value of the existing
asset is ________. (See Table 8.4.)

A) $21,000

B) $43,000

C) $52,000

D) $80,000

184.For Proposal 3, the tax effect on the sale of
the existing asset results in ________. (See Table 8.4.)

A) $8,000 tax
liability.

B) $16,000 tax liability.

C) $20,000 tax
liability.

D) $23,200 tax
liability.

185.Which of the following capital budgeting
techniques ignores the time value of money?

A) Payback.

B) Net present value.

C) Internal rate of return.

D) Two of the above

186.Diagrams that permit the mapping of the various
investment decision alternatives and payoffs as well as their

probabilities
of occurrence are called

A) simulations.

B) sensitivity
analysis.

C) decision trees.

D) multiple
regression analysis.

187.________ measure(s) the risk of a capital budgeting
project by estimating the NPVs associated with the optimistic, most likely, and
pessimistic cash flow estimates.

A) Simulations

B) Risk-adjusted discount rates

C) Sensitivity analysis

D) Multiple regression analysis

188.The advantage of using simulation in the capital
budgeting process is

A) ease
of calculation.

B) the availability of a continuum of risk-return trade-offs
which may be used as the basis for decision-making.

C) dependability
of predetermined probability distributions.

D) that
it generates a continuum of risk-return trade-offs rather than a single-point estimate.

189.Many firms use the payback method as a guideline
in capital investment decisions.Reasons
they do so include all of the following EXCEPT

A) it
gives an implicit consideration to the timing of cash flows.

B) it recognizes cash flows which occur after
the payback period.

C) it is
a measure of risk exposure.

D) it is
easy to calculate.

190.Payback is considered an unsophisticated capital
budgeting because it

A) gives
explicit consideration to the timing of cash flows and therefore the time value
of money.

B) gives
explicit consideration to risk exposure due to the use of the cost of capital
as a discount rate.

C) gives
explicit consideration to the timing of cash flows and therefore the time value
of money.

D) none of the above.

191.Some firms use the payback period as a decision
criterion or as a supplement to sophisticated decision techniques, because

A) it
explicitly considers the time value of money.

B) it can be viewed as a measure of risk
exposure because of its focus on liquidity.

C) the
determination of the required payback period for a project is an objectively
determined criteria.

D) none
of the above.

192.A firm is evaluating a proposal which has an
initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000
in year 2, and $10,000 in year 3. The payback period of the project is

A) 1 year.

B) 2 years.

C) between
1 and 2 years.

D) between 2 and 3 years.

193.If the NPV is greater than the initial
investment, a project should be accepted. Answer:FALSE

194.If the NPV is greater than $0.00, a project
should be accepted. Answer:TRUE

195.The NPV of an project
with an initial investment of $1,000 that provides after-tax operating cash flows of $300
per year for four years where the firm's cost of capital is 15 percent is
$856.49. Answer:FALSE

196.The NPV of an project
with an initial investment of $1,000 that provides after-tax operating cash flows of $300
per year for four years where the firm's cost of capital is 15 percent is
$143.51. Answer:FALSE

197.The NPV of an project
with an initial investment of $1,000 that provides after-tax operating cash flows of $300
per year for four years where the firm's cost of capital is 15 percent is -$143.51. Answer:TRUE

198.The risk-adjusted discount rate (RADR) is the risk-adjustment
factor that represents the percent of estimated cash inflows that investors
would be satisfied to receive for certain rather than the cash inflows that are
possible for each year. Answer:FALSE

199.The risk-adjusted discount rate (RADR) is the rate
of return that must be earned on a given project to compensate the firm's
owners adequately, thereby resulting in the maintenance or improvement of share
price. Answer:TRUE

200.A market risk-return function is a graphical
presentation of the discount rates associated with each level of project risk.
Answer:TRUE

201.Risk-adjusted discount rates (RADRs) are the risk-adjustment
factors that represent the percent of estimated cash inflows that investors
would be satisfied to receive for certain rather than the cash inflows that are
possible for each year. Answer:FALSE

202.What is the NPV for the following project if its
cost of capital is 15 percent and its initial after
tax cost is $5,000,000 and it is expected to provide after-tax operating
cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year
3 and $1,300,000 in year 4?

A) $1,700,000.

B) $371,764.

C) ($137,053).

D) None of the above.

203.What is the NPV for the following project if its
cost of capital is 0 percent and its initial after tax
cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of
$1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000
in year 4?

A) $1,700,000.

B) $371,764.

C) $137,053.

D) None of the above.

204.What is the NPV for the following project if its
cost of capital is 12 percent and its initial after tax cost is $5,000,000 and
it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000
in year 2, $1,700,000 in year 3 and ($1,300,000) in year 4?

A) $(1,494,336).

B) $1,494,336.

C) $158,011.

D) Two of the above.

205.The amount by which the required discount rate
exceeds the risk-free
rate is called

A) the
opportunity cost.

B) the risk premium.

C) the
risk equivalent.

D) the
excess risk.

206.A sophisticated capital budgeting technique that
can be computed by solving for the discount rate that equates the present value
of a projects inflows with the present value of its outflows is called internal
rate of return Answer:TRUE

207.If its IRR is greater
than $0.00, a project should be accepted. Answer:FALSE

208.If its IRR is greater
than 0 percent, a project should be accepted.Answer:FALSE

209.If its IRR is greater
than the cost of capital, a project should be accepted. Answer:TRUE

210.A firm's investment opportunities schedule (IOS)
is a graphical presentation of the firm's collection of project IRRs in
descending order against the total dollar investment. Answer:TRUE

211.Real options are opportunities that are embedded
in capital budgeting projects that enable managers to alter their cash flows
and risks in a way that affects project acceptability. Answer:TRUE

212.Consider the following projects, X and Y, where
the firm can only choose one. Project X costs $600 and has cash flows of $400
in each of the next 2 years. Project Y also costs $600, and generates cash
flows of $500 and $275 for the next 2 years, respectively. Which investment
should the firm choose if the cost of capital is 10 percent?

A) Project X.

B) Project Y.

C) Neither.

D) Not enough information to tell.

213.Consider the following projects, X and Y where
the firm can only choose one. Project X costs $600 and has cash flows of $400
in each of the next 2 years. Project B also costs $600, and generates cash
flows of $500 and $275 for the next 2 years, respectively. Which investment
should the firm choose if the cost of capital is 25 percent?

A) Project X.

B) Project Y.

C) Neither.

D) Not enough information to tell.

214.Tangshan Mining Company is considering investing
in a new mining project. The firm's cost of capital is 12 percent and the
project is expected to have an initial after tax cost of $5,000,000.
Furthermore, the project is expected to provide after-tax operating cash flows of
$2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3 and
($1,300,000) in year 4?

(a)Calculate the project's NPV.

(b)Calculate the project's IRR.

(c)Should the firm make the investment?

Answer:

No the firm
should not accept the project.

Table 9.10

A firm must choose from six capital budgeting proposals
outlined below. The firm is subject to capital rationing and has a capital
budget of $1,000,000; the firm's cost of capital is 15 percent.

215.Using the internal rate of return approach to
ranking projects, which projects should the firm accept? (See Table 9.10)

217.When the net present value is negative, the
internal rate of return is ________ the cost of capital.

A) greater
than

B) greater
than or equal to

C) less than

D) equal
to

218.A firm is evaluating two independent projects
utilizing the internal rate of return technique. Project X has an initial
investment of $80,000 and cash inflows at the end of each of the next five
years of $25,000. Project Z has a initial investment
of $120,000 and cash inflows at the end of each of the next four years of
$40,000. The firm should